Energy sector can expect an Uber and Kodak moment all in one*

Battery With Energy Progress Bar Loading

Politicians are feverishly driving quick fixes for an ailing energy sector. But heavy-handed government interventions risk more road kill, of an endangered species called market led microeconomic reform.

Energy markets in Australia have devolved into a sandpit for political adventurism rather than bringing together customers and efficient suppliers. An unpalatable energy status quo is now the result, set in concrete by an absence of good policy design and a fake commitment to markets.

When Australia floated the $A in 1983 there was no fiddling at the edges of the foreign exchange market. Quality institutional structures were put in place and not meddled with; political interference with interest rates and exchange rate targeting was cast aside permanently.

If only energy markets were given the same rock solid foundations.

Markets demand consistency with rules and protocols that govern them. Governments can play a pivotal role in their setting and ongoing integrity towards achieving reliable, responsible and efficient energy.

It’s not too late for change. State and Federal governments must adhere hard earned lessons from past reforms. First, is to get out of the kitchen and back into the boardroom.

Setting good market design is key. Microeconomic reform from 1980s to early 2000 was a gift that keeps on giving. Corporatisation, privatisation and market reform continues to underpin today’s high living standards.

It swept away layers of absurd bureaucratic intervention. Many would recall not so long ago taxpayers paid teams of inspectors to studiously spot-check Ansett and TAA; their job was to ensure meals served on domestic airlines were precisely equivalent in quality and quantity. Competition was outlawed.

Going back to this would be intolerable. But when governments intervene over the top of markets as we have witnessed in energy, then the door is open to this bureaucratic slippery slope.

Setting clear objectives and then prescribing the consequences to market actors if they are not met is where Government can do their best; this is the language of performance, success and partnership with private sector.

The new holy trinity for energy security appears to be a combination of gas, batteries and renewables. There might be merit in this formula but we should be circumspect and so should Dr Finkel in his forthcoming review.

Periods of rapid technical change quickly reveal stranded assets and flawed argument. In the late 1700s, sophisticated conversation at many gentlemen clubs around London seriously contemplated how the world could possibly grow enough grass to feed all the horses required to power an industrialised Britain.

Nobody in the energy debate wants to be the modern equivalent of a well meaning but entirely irrelevant and flawed reasoning of the gentlemen club.

That is why governments must change. If they try and micromanage the transformation of energy it will almost certainly deny the nation its innovation, productivity and wealth generation potential for at least a generation.

Business as a protagonist for microeconomic reform has lost its edge. Cosy and profitable relationships appear to have usurped a previous zeal for challenging the nation for better long-term outcomes. Social licence matters and business can and should be powerful voices for reform, restless with the status quo not its silent guardian.

The transformation of energy is going to be breathtaking. It will have equivalence to other upheavals like the advent of passenger motor vehicles, and the impact of refrigeration that changed food production and distribution. Improved storage and reduced perishability of food opened up new trading platforms including the Chicago Futures Exchange.

Energy production and dispatch is changing. The consequences of storage through batteries at multiple levels of the value chain will be profound. Individuals and corporates alike will be able to aggregate and make their surplus energy substitutable and tradeable in both time and geography.

Energy is on the cusp of having its Uber and Kodak moment all in one.

As a result current institutional arrangements and many legacy assets will be stranded. In fact structures and trading mechanisms for new energy markets do not exist yet.

How the energy sector will arrange itself is a big question; where profit will be created an even bigger one. But that is where fortunes will be made and lost.

Energy in Australia need not be a slow motion accident that we passively watch happen. Markets are a key part of the solution, and so is redressing dire straits of public policy capacity and reform appetite that has dissolved since the hey days of Hawke, Keating and Howard.

Politicians that shift the blame for Australia’s energy woes onto markets and previous microeconomic reform is a new normal we must reject because left unchallenged will only diminish the nation’s future.

* A version of this article appeared in the Australian Financial Review on 23 March 2017.

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